Which two smallcap ideas is Ashish Chugh upbeat on?

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Investment Analyst & Author of Hidden Gems, Ashish Chugh, in an interview on CNBC-TV18, spoke about two of his multibagger ideas in the smallcap space. He is bullish on Fedders Lloyd and Agre Developers .

 

Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. For the complete interview watch the accompanying video.

Q: Let us start of with Fedders Lloyd?

Fedders Lloyd is a Delhi based company which is primarily into three business segments. They are into refrigeration and air-conditioning, engineering and structural steel business and also operate in the power transmission and distribution business. As far as the air-conditioning and refrigeration business is concerned, they provide air-conditioning solutions mainly for commercial establishments. They cater to institutions like railways, mining, defense segments and corporate sector.

In the engineering and steel structural business, they provide turnkey fabrication solutions for large industrial projects. In the power transmission and distribution business they provide EPC solutions for power transmission and distribution projects.

 

If you look at the financials of the company, FY10 sales were close to Rs 700 crore which were up by 50% compared to FY09. Profit after tax (PAT) was about Rs 40 crore, up from about Rs 11 crore which the company did in FY09. The financial year for this company is from July to June. In Q1 ended September of 2010, they have done sales of close to Rs 190 crore, up by about 18% over the same period last year. Profit after tax was about Rs 11.5 crore, up by about 35%.

 

EPS on trailing 12 months basis is close to Rs 15 which means at a current price of about Rs 75-76 the stock is traded at a P/E multiple of just about 5-5.5. If you compare this company with their peer group namely Blue Star and Voltas Ltd, you find a significant undervaluation to the peer group. Voltas and Blue Star, both command a P/E of close to 18-20 times and they have a marketcap of about 1.5 times of their sales.

 

In the case of Fedders Lloyd, this company trades at a P/E multiple of about 5-5.5 and as a marketcap to sales of just about 0.35. The marketcap of this company is just about Rs 235 crore and does sales of around Rs 700-750 crore. If you see the balance sheet, this company is asset rich. Out of the total gross block of about Rs 150 crore, they have a freehold land of about Rs 38 crore, a five acre plot which is located at a prime place in South Delhi which maybe very valuable as of now.

 

The main trigger for rerating of Fedders Lloyd is not going to be the property but it is going to be sustainability of earnings. The major concern about this company is the low dividend payout. Even though this company makes an earning of about Rs 15, this company pays only Re 1 dividend to the shareholders. That is a bit of a concern.

 

The rerating for the stock could be on account of increased investor friendliness of the company. If they are able to sustain its earnings and grow at the same pace for which it has been growing for the past couple of quarters, I think we could see a rerating of the stock.

 

Q: What is the story with Agre Developers?

 

A: This is a new company which came into existence just about 20-25 days back. It is a Pantaloon group company where there was a scheme arrangement wherein the mall management and mall development business of Pantaloon Retail was demerged and put into a separate company called Agre Developers. Shareholders of Pantaloon Retail were given one share of Rs 10 of Agre Developers for every 20 shares of face value of Rs 2.

 

As things stand today, the equity of Agre Developers is about Rs 11 crore and the shareholders of Pantaloon Retail became the shareholders of Agre Developers via the scheme of arrangement. The idea behind this demerger was to enable growth of the mall development and mall management business as a separate entity.

 

The current price is about Rs 48-49, equity of Rs 11 crore which means that the marketcap of the company is about Rs 50-55 crore. So you have a Pantaloon group company available at a marketcap of about 50-55 crore. Now, if you see the financials, for the first six months of the current financial year, the revenues are about Rs 45 crore, the company made a net loss of about Rs 1 crore. With annualized revenues of about Rs 90 crore, the marketcap is just about Rs 55 crore, which is not even one time of revenue.

 

If you take a look at the balance sheet, the equity is about Rs 11 crore and reserves are close to Rs 250 crore, which means a book value of about Rs 240. As against the book value of Rs 240, you have the stock available at less than Rs 50, which is just about 20% of the book value.

 

If you see it in totality, they have a debt of about Rs 85 crore on the balance sheet, which means an enterprise value of about Rs 130-140 crore. As against the enterprise value of Rs 140 crore, the company has got a gross block of about Rs 215 crore and also capital work in progress of Rs 40 crore. Out of this gross block of Rs 215 crore, about Rs 80 crore is hard asset in the form of land and building. This is something which gives a lot of comfort as far as the downside in the stock is concerned.

 

They also currently manage about six malls while they have about 24 malls, which will be operational in FY12. In the next one-two years, you can see a massive scalability of operations. Now, this is probably the only listed company involved in mall management business which is a niche business. Being the only listed company and not having any peer group comparison, the valuation, I believe, is just a perception.

 

From these levels, the downside looks extremely restricted but given the scalability and the management behind it, this could indeed turn to be a real multibagger if held on for maybe three-five years. If you see the shareholding pattern of the company, promoters hold close to 44%. There is a huge amount of institutional holding in the company - institutions hold close to 37% of the company. A lot of these institutional investors may not be interested in a Rs 50-55 crore marketcap company.

 

It is possible that you may see unloading from some of those institutional investors, which maybe an opportunity for the HNI and retail investors. From these levels, the downside looks extremely restricted. There is scalability, which is going to come in the next couple of years and from these levels, the probability of going wrong in the stock seems to be very little.